Sliding share price could open Vancouver-based company to takeover attempts

Omar Saad of International Strategy & Investment Group LLC recently highlighted Lululemon as a potential takeover target for VF. A takeover at $50 a share, a 29-per-cent premium to Tuesday’s close, could be accretive for the maker of Wrangler denim and Ella Moss dresses, he wrote.

Photograph by: Kevork Djansezian
, Getty Images

NEW YORK — Lululemon Athletica Inc. has just been marked down by $1 billion.

The exercise and yoga-pant maker’s stock price plunged 16 per cent after the company cut its full-year earnings forecast last week. That decline added to the $5.5 billion already wiped out in the last year amid a product recall and management shuffle, leaving Lululemon trading near its lowest earnings multiple since 2009. While the $5.6 billion retailer may not want to sell at this level, the drop could encourage an opportunistic buyer to make an approach, according to Scott Rostan of Training The Street.

Suitors willing to court Lululemon’s founder and largest shareholder Chip Wilson could take a company that’s projected to boost sales 46 per cent over the next three years. VF Corp., owner of the Vans and The North Face brands, is one of the most likely candidates to consider acquiring Lululemon, said Canaccord Genuity Group Inc. Adidas AG also would make sense as a buyer because the sporting-goods maker could use its international expertise to help guide Lululemon’s overseas expansion, Wedbush Inc. said.

“If you believe the long-term growth prospects and fundamental value of the company, maybe now is the time to talk to them,” Rostan, whose New York-based firm teaches new hires at investment banks how to structure mergers and acquisitions, said by phone. “Given where their valuation is now, there’s probably some sniffing going on.”

A representative for Vancouver-based Lululemon didn’t respond to phone or e-mail requests for comment.

Lululemon plunged last week, erasing more than $1 billion in market value in a single day, after saying sales have been slower than expected and full-year earnings will be lower than earlier forecast. While the stock has gained 3.9 per cent since, the company’s market value is still down about $800 million.

The share value has been slipping since last June, when chief executive officer Christine Day announced she was stepping down. Sales growth has stalled in the last year as increased quality checks slowed deliveries of new apparel. It’s also been forced to regain shoppers after recalling a popular yoga pant line because they were too sheer.

With the stock drop, Lululemon hasn’t been this cheap for potential buyers since July 2009, one month after the end of the worst U.S. recession since the Great Depression. The retailer’s price-earnings ratio of 21 Tuesday is about half its five-year average, according to data compiled by Bloomberg.

“It becomes a little bit more realistic,” even though Lululemon is still relatively expensive compared with peers, Howard Tubin, a New York-based analyst at RBC Capital Markets, a unit of Royal Bank of Canada, said in an interview. “They’re a large player in a very attractive segment of apparel, the women’s athletic apparel market. They have a lot of growth prospects.”

Analysts estimate Lululemon will boost sales to $2.3 billion in the year ended January 2017 as it expands into men’s wear and international markets. That compares with $1.6 billion last year and represents a fivefold increase from the year ended January 2010.

“It could be enticing to some,” Tubin said.

Lululemon could be a good fit for VF because the larger company already has a presence in athletic apparel, said Camilo Lyon, a New York-based analyst at Canaccord. VF, which traces its retailing roots back to 1899, could also use its expertise to remedy Lululemon’s supply-chain challenges and cut costs, Lyon said.

Omar Saad of International Strategy & Investment Group LLC highlighted Lululemon as a potential takeover target for VF last month. A takeover at $50 a share, a 29-per-cent premium to Tuesday’s close, could be accretive for the maker of Wrangler denim and Ella Moss dresses, he wrote.

Lululemon’s “value proposition of superior product quality and an engaging store experience has been a beacon of light in the dark ocean of specialty retail mediocrity, leading to tremendous profitability and growth until this point,” Saad wrote in the May report. VF “has in spades what Lulu lacks,” such as a scaled supply chain.

Adidas, based in Herzogenaurach, Germany, and generates more than 75 per cent of its sales from outside North America, also could be a logical buyer should a deal occur, said Corinna Freedman an analyst at Wedbush.

“That could make a lot of sense, especially given Adidas’s international expertise,” Freedman said.

Laurent Potdevin, who took over as Lululemon’s CEO in January, said in March he wants to accelerate the retailer’s international expansion plans. The company earned 95 per cent of its revenue last year from the U.S. and Canada.

Nike Inc. may also be interested in adding Lululemon’s tank tops and yoga pants to its athletic line, according to Jennifer Black, chief executive officer at Lake Oswego, Ore.-based Jennifer Black & Associates, who said the company’s takeover prospects will increase if it continues to struggle this year.

“Shareholders will become frustrated,” Black said in an interview. “Shareholders are going to give them the benefit of the doubt for a long period of time. But if they don’t execute, they are an open target.”

Representatives for Greensboro, North Carolina-based VF and Adidas declined to comment, as did a representative for Beaverton, Or.-based Nike.

Any suitor may want wait for an improvement in Lulu’s earnings before considering a deal, said Freedman of Wedbush and Jaime Katz of Morningstar Inc.

“You want to see things stabilize before you jump into the crossfire,” Katz, a Chicago-based analyst, said in an interview. “It’s going to be a little bit of time before any other large retailer would feel comfortable folding this business in. It just seems like there’s a lot of internal turmoil that’s trying to settle itself down right now.”

Part of that turmoil is related to Wilson, who last week voted against the re-election of his successor as chairman, saying the board has been too concerned with short-term results. With an almost 30 percent stake, Wilson can influence or control strategic changes, including approving a merger, Lululemon said in its most recent annual filing.

“You have a very big shareholder who has a mind of his own,” Katz said. “In order to get everybody on board, Chip Wilson needs to be on board.”

While Wilson and the rest of Lululemon’s management team probably isn’t interested in selling when the company’s stock price is so low, its plunging shares could encourage an activist to approach and push for changes, including a sale, said Pamela Quintiliano, a New York-based analyst at SunTrust Banks Inc.

“This space is filled with activists right now,” she said in an interview. “I don’t know that they’d be successful in pressuring, but there’s clearly an opportunity for someone to come in.”

The drop may also be dramatic enough to entice buyers to approach on their own, said Frank Beck, president of Austin, Tex.-based Beck Capital Management. Beck said his firm, which oversees about $250 million, had sold its Lululemon shares before the earnings report last week.

“The drop has at least made the valuation down low enough that, if it went down a little lower, I’d consider buying shares myself,” Beck said in a phone interview. “It would be really attractive to a lot of companies.”

Omar Saad of International Strategy & Investment Group LLC recently highlighted Lululemon as a potential takeover target for VF. A takeover at $50 a share, a 29-per-cent premium to Tuesday’s close, could be accretive for the maker of Wrangler denim and Ella Moss dresses, he wrote.

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